Exchange-traded funds (ETFs) offer increased flexibility to retail investors, offering exposure to a given region, country, index, industrial sector or commodity in an easily-traded market-quoted instrument. But with precious metals such as platinum and gold hitting record highs, is ETF demand for underlying exposure to these commodities impacting on prices?
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Certainly, when ETFs offering exposure to platinum were first mooted toward the end of 2006, some in the mining industry thought with such a constrained market for the white metal already, new investment demand would divert physical product and lead to price spikes, to the detriment of genuine industrial consumers.
When two platinum ETFs were launched earlier this year they were however seen as damp squibs - initial platinum holdings through these instruments seemed slight, stabilising around 60,000 oz through the summer and autumn. But platinum’s recent price strength has seen total holdings more than double since mid-October, now standing at almost 150,000 oz. And UBS metals analysts believe that at this level, ETFs are indeed a factor maintaining platinum at all-time highs, even as other metals have declined recently.
Gold ETFs have also seen dramatic inflows on the back of recent price strength in the yellow metal, with total gold holdings across seven different instruments listed on markets across the world recently notching an all-time high of 27m oz. Although this represents a sizeable amount diverted from the global gold market, UBS believes gold ETF holdings would have to grow twice or three times over to begin to impact gold liquidity.
Both gold and platinum look set to maintain current elevated price levels into 2008, both somewhat geared to a declining dollar and inflation fears alongside supportive real-world supply and demand factors. Given performance over the past few months, it seems ETF-based demand has the potential to both heighten price spikes and deepen price troughs for both metals over the coming year.
